On September 30, Robert Herz stepped down as chairman of the Financial Accounting Standards Board, leaving board member Leslie Seidman as acting chairman. Neither FASB nor Herz would comment on why he retired after more than eight years in the job, but it probably wasn’t due to any lack of popularity. Nearly all of those who worked with the 57-year-old Herz commend his blend of intellect and calm. Herz has done a “terrific job,” says Dennis Beresford, accounting professor at the University of Georgia’s J.M. Tull School of Business and a former FASB chairman himself. “He’s dealt with tough issues and tough board members — not all of them are easy to work with — and he’s been able to get the board to resolve some very difficult issues.”
“I don’t think there was ever a raised voice when Bob spoke,” says Mark Ellis, CFO of luxury goods retailer Michael C. Fina and a six-year veteran of the FASB small business advisory committee. “He truly had the intellect to understand both sides of an argument and explain the reasoning behind decisions made that both sides would understand and appreciate.”
In an exclusive interview with CFO, conducted via e-mail, Herz reflected back on his tenure at FASB and speculated about his future. The following is an edited version of the interview.
As you look back over your years at FASB, what do you think is your legacy?
I can point to the scores of pronouncements we issued, but I’m also very proud of many other things we did over the last eight years to improve accounting standard-setting. Those included rationalizing the standard-setting structure in our country so that most pronouncements now come out from the FASB versus the four-legged stool of the FASB, AICPA, EITF, and SEC before. I’m also very proud of the codification effort, which has [created] a much better organized and more accessible set of U.S. GAAP literature.
We also significantly broadened our outreach to various constituencies through new advisory groups with investors and with small business and private companies. We strengthened our staff . . . and we stepped up our involvement with the accounting academic community by reinstituting an accounting academic fellowship program and through our Financial Accounting Standards Research Initiative.
We also did things to make the process more transparent and open, including making our standards available on the Web free of charge and audiocasting our meetings for free on the Web. Finally, and very importantly, there has been the whole international convergence effort.
Which accounting pronouncement made the greatest single improvement to the accounting literature during your tenure?
It’s hard to single out any particular one. [One] example of what I think was [a] good and interesting pronouncement [is] Statement 157. Before that standard there were many different definitions and approaches to fair value measurements. What that standard did was to provide a common definition of fair value, how to approach it in different circumstances, and standardized disclosures around fair value measurements included in the financial statements.
The second standard I’d mention is Statement 167, which is the recent changes to the guidance on consolidation of variable interest entities. What I like about that particular pronouncement is that it sets out clear principles and then provides a good set of implementation guidance, particularly in the form of examples.
When comparing U.S. generally accepted accounting principles and international financial reporting standards, it seems as though some rules will be impossible to converge, such as those that pertain to LIFO inventory accounting and revaluation of property, plant, and equipment [PP&E], among others.
There are a number of specific continuing differences between U.S. GAAP and IFRS that do pose challenges . . . but I believe that with continued [cooperation], solutions can be found. Sometimes the solutions may not just involve accounting answers. For example, in the case of LIFO inventory, the IRS is aware of this issue, and one solution might involve changes to the tax code. Regarding the revaluation of PP&E, FASB is now looking at the use of fair value for investment properties.
In 2003, you stated that FASB’s implementation of fair-value standards wouldn’t outstrip the ability of people to properly implement the concept. In hindsight, considering the liquidity crisis of 2008, do you think FASB met this challenge?
Just as many other parties did during the financial crisis, I’d [note] that we didn’t have an existing playbook for what many termed an “unprecedented” crisis. Nevertheless, I believe we dealt pretty vigorously with issuing guidance on how to deal with the challenges of fair-value measurements and impairments of financial assets.
You spent quite a lot of time on the hot seat before Congress, especially during the crisis. Would you say that during your tenure things got better, worse, or remained unchanged with respect to political influence over accounting standards and the independence of FASB?
While I was certainly on the proverbial hot seat during the financial crisis . . . I actually appeared many more times in front of Congress during the debate on accounting for stock options a number of years ago. I feel that things have gotten a little bit better over the last eight years. I believe that, overall, there’s been respect for our due process and the importance of it remaining thorough, objective, and as unbiased as possible.
What was the toughest battle you had to face?
I don’t like using the word “battle,” but the most challenging situation in terms of trying to improve the accounting in an important area related to accounting for employee stock options, in 2003-2005. Members of the high technology and venture capital communities strongly opposed our proposal to require the recording of compensation expense related to the granting of executive and employee stock options. They had many lobbyists and PR firms. It got so far as the House passing a bill that would have effectively blocked the expensing of stock options.
Fortunately, we also had very strong support from a number of quarters for making the accounting change. In the end, we were able to make that needed change, which was an important outcome for financial reporting.
Under current GAAP, there are individual revenue-recognition accounting rules for about 25 different industries. The joint FASB-IASB revenue-recognition exposure draft [ED] standardizes many of those rules. Still, with 25 industries arguing that they need specialized rules, how likely is the ED to remain in its current form?
I think the ED provides a good basis for a broad standard on revenue recognition. During the development of the ED, we and the IASB held a number of workshops with companies from around the world to beta-test a variety of different transactions and arrangements across different industries. [We wanted] to understand whether the model could be applied, and I think we generally found that it could.
That’s not to say that the exposure draft is perfect. Some challenging issues revolve around the definition of transfer of control, because that’s key to revenue recognition under the proposed model. [Another challenge is] around the cost side of the accounting, because we decided it was important to address the related costs in order to properly portray profit margins.
There are a few industries we’ve heard from for which the proposed model poses some challenges. And we’ve heard from some users that follow software companies that the model may provide for too much accelerated revenue recognition. But those are the types of things the boards will deal with in redeliberations.
Regarding lease accounting, do you think that in your lifetime that FASB will achieve Sir David Tweedie’s goal of flying on an airplane that’s on the balance sheet of the airline that owns it?
I think the answer is yes. We recently put out jointly with the IASB an exposure draft on lease accounting. Under the so-called right-of-use model proposed in the ED, the right to use the equipment — in this case the airplane — for a period of time would be shown as an asset, and a corresponding liability would be recorded for the present value of payments that are to be paid for that right of use.
I think that is a good approach, but again it’s out for comment, and the boards will benefit from the comments they receive and will carefully consider those comments in redeliberations.
If you look ahead five years, do you see U.S. accounting standards converged with the rest of the world’s?
That’s hard to predict. The SEC staff are currently working their way through a systematic work plan to look at a variety of issues relating to potential incorporation of IFRS into our reporting system. When they’ve completed that work plan, they will be able to go to the commission with recommendations on whether, when, and how to proceed regarding IFRS for U.S. public companies. In the meantime, I believe it’s up to the two boards to continue to work together toward developing standards that foster both convergence and improvement in reporting.
Do you have any plans to rejoin the IASB?
Well, I very much enjoyed my time on the IASB, and I have very much enjoyed working with our colleagues at the IASB. But right now I’m looking forward to new experiences and challenges. I’m 57, and as I look at people I admire, like Paul Volcker and Bill Donaldson, I see that they’ve contributed in many different ways over their distinguished careers.
So, while I certainly wouldn’t rule out returning to accounting standard-setting at some point, right now I’m looking forward to doing new things. I’d like to do a bit of teaching, I’d like to serve on some corporate boards, and I already have been involved with some not-for-profit activities. And I also hope to find ways to continue to contribute to financial reporting, the capital markets, and the public interest.